NOTE: The instructions for answer formats has been repeated here for your reference. • For answers that are interest rates, give your answers as a percentage. Round these answers to 4 decimal places...

NOTE:

The instructions for answer
formats has been repeated here for your reference.

•

For
answers that are interest rates, give your answers as a percentage. Round these
answers to 4 decimal places where
appropriate.

•

For
answers that are dollar amounts, give your answers as dollars, rounded to the nearest
cent.

•

Some
parts of this assignment may require you to use an answer from an earlier part.
In such cases, you will need to use the

EXACT

value,
and not the rounded value, of the answer from the earlier part.

Assignment Questions

Your friend Suzie has just started a new job as a
salesperson for a range of financial products offered by Wagon Financial. To
her surprise, customers of Wagon Financial ask her very technical questions
about the products she sells. Whilst Suzie has worked in sales before, she is
not familiar with the products and has asked for your help to better understand
them.

The first product Suzie represents is a short-term
loan. Here, customers can borrow

small amounts of money, and have some options for
the amount of time to repay the

loan. Based on Wagon Financial’s
past experience, the most typical loan amount for

customers of this service is

$
1,250. The table below shows the
repayments for the loan

term options available.

Using the information provided, answer the
following questions.

a) For each of the above loan term options, calculate the equivalent

simple

annual

interest rate. (2
marks)

b) We see that each

additional

month
will cost the borrower

$
50 in
additional interest. Calculate the equivalent

simple

annual
interest rate for this

$
50 per
month. (1
mark)

c) For a loan of

$
1,250
with interest of

$
50 charged
in the first month, calculate the

equivalent

compound effective

annual
interest rate. (1
mark)

d) You should find that your answer in part c) is larger than your
answer in part

b). By considering simple and compound interest rates, give an
explanation of this difference. (1
mark)

The second product Suzie represents is an annuity.
The customers of this product are

typically retirees that use their retirement
savings to buy a steady income stream. Like

before, there are a range of options for this
product, but the most typical arrangement

is as follows:

•

Customers buy this product on
their 65
th

birthday when they retire.

•

The annuity will make 20 annual
payments of

$
80,000.

•

The first annual payment of

$
80,000 will occur on the customer’s 68
th

birthday

(customers typically rely on
their personal savings to travel for the first few years).

•

For this product, Wagon Financial
can invest the customers’
money at 12% per

annum effective.

Using the information provided, answer the
following questions.

e) What price should Wagon Financial charge for this product? (2 marks)

f) Suppose that Joseph, an existing customer of this product (with the
arrangement

specified above), has just
received the fifth payment of this annuity.

Using the


prospective

method, how much money does Wagon Financial need to
have set aside today (immediately
after the fifth payment is made) to be sure that they can afford to make all
future payments to Joseph?

NOTE: Calculations done with the

retrospective

method
will not score any marks.

(2 marks)

g) Suppose that immediately after making the fifth payment to Joseph as
described

above, Wagon Financial also implements a new investment strategy which
they

believe will yield even higher investment returns than the original 12%
per annum.

Assuming this to be true, would Wagon Financial need to set aside more
or less

money than your answer in part f) to be sure that they can afford to
make all future payments to Joseph? Justify your answer. (1 mark)

h)

BONUS QUESTION

Joy is nearing retirement and is considering buying
an

annuity product fromWagon Financial. However, she is considering adding
a clause that says she will only receive the annual

$
80,000 payment if she is alive at
the time of the payment (up to a maximum of 20 payments). Other than this
clause, the specifications for the annuity she is considering are exactly the
same as described above.

Should Joy expect the price for this product to be cheaper or more
expensive by

adding this clause?
(1 mark)

Note that this bonus mark

CANNOT

push your
total mark above the maximum

total of 10.